In May, President Clinton practically anointed New Hampshire lawyer Christopher Gallagher as his Federal Deposit Insurance Corp. chairman. Today, Mr. Gallagher seems to be out of the running, in large part because of his outspoken criticism of the FDIC Improvement Act Of 1991. Here are some of his remarks before a House Banking subcommittee on May 11.
In January 1991, a group of New England businessmen met in Washington with the full New England congressional delegation. We explained that the New England credit crunch was real, that it had definable and predictable stages and progressions, that the ongoing, post-S&L bank examination process had curtailed lending to small business, and that its repressive format would stand in the way of lending to bank-dependent small business when loan demand returned to the marketplace.
We explained that the regulator agencies understood the repressive impact of their new approach, but that they were responding to pressure from Congress to build capital in the banking system in order to relieve pressure on the Bank Insurance Fund. Until Congress advised otherwise, it was clear the carnage would continue.
The New England delegation, which by then had begun to speak up, turned up the volume and slight changes began to occur, but the crackdown in New England continued. Worse, its processes became institutionalized for the entire country in the from of FDICIA.
FDICIA constitutes the statutory version of the repressive overkill that preceded it. The regulatory approach now built into FDICIA can cause what happened in New England to happen elsewhere in the country whenever any region's cyclical economy strains its banking resources.
If Congress intends to address the problems now built into our banking system by FDICIA, it must understand how FDICIA can work to retard lending rather than to stimulate it. If FDICIA (with its continued drag on lending to small business) is not repealed, and if needed modifications are still unlikely, at least its worst feature can be mitigated. Its worst feature is the uncertainty it brings to the process of lending.
Pressure from Lawmakers
FDICIA gives wide discretion to regulators who, in turn pear to be reacting to congressional pressure. This impression alone can be paralyzing.
As long as bankers believe that regulatory discretion can be influenced by politics, FDICIA tells themn not to assume the risk of business lending. Thus the price of FDICIA, which is loans not being made, is jobs not being created. If FDICIA cannot be repealed or even modified, lenders must be convinced that the bank regulators have returned to a system of balanced regulation, designed to encourage sound lending.